CSX

CSX Corporation 10-Q Summary: Quarter Ended September 25, 1998

Business Context and Reporting Period

CSX Corporation, a diversified freight transportation company, filed its Form 10-Q for the 13-week quarter and 39-week period ended September 25, 1998. The company is currently in the pre-integration phase of its joint acquisition of Conrail with Norfolk Southern, having received regulatory approval for joint control on August 22, 1998. Full operational integration is expected in early 1999. The company also completed the conveyance of its barge subsidiary, American Commercial Lines (ACL), to a joint venture with Vectura Group in June 1998.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Operating revenue decreased 8% in Q3 and 6% for the nine months compared to 1997. This was driven by the exclusion of barge operations (conveyed in June 1998), weak coal export demand, and trade imbalances in container shipping due to the Asian economic crisis.
• Earnings Impact: Net earnings declined 9% in Q3 and 27% for the nine months. However, results were significantly boosted by a one-time net investment gain of $154 million from the barge sale and a $30 million restructuring credit.
• Conrail Impact: Costs associated with the Conrail investment and integration reduced net earnings by $40 million in Q3 and $119 million for the nine months. Conrail itself reported a net loss of $65 million for Q3 1998, largely due to $187 million in after-tax acquisition-related charges.
• Operating Ratio: The consolidated operating ratio worsened to 88.9% in Q3 1998 from 85.5% in Q3 1997. The rail unit's operating ratio increased to 80.8% from 76.8%.

Guidance, Outlook, and Risks

• Conrail Integration: The primary focus for the remainder of 1998 and early 1999 is the integration of Conrail operations. Management anticipates costs for hiring, training, and system integration will continue, with benefits expected to materialize post-integration.
• Market Conditions: Outlook remains cautious due to weak export coal demand (strong U.S. dollar), Asian economic instability affecting container shipping, and rail congestion. Automotive production is expected to remain strong.
• Year 2000 (Y2K): CSX is on schedule for Y2K remediation, with completion expected by mid-1999. Total costs incurred to date are $33 million, with total project costs estimated at approximately $87 million (10% of IT budget). Risks include potential system failures affecting operations.
• Litigation: A $2.5 billion punitive damages award from a 1997 New Orleans fire case was set aside by the Louisiana Supreme Court in October 1997. Management believes any adverse outcome will not be material to overall financial position, though it could impact a specific quarter.
• Liquidity: The company maintains a working capital deficit of $489 million, which is typical for the industry and does not indicate a lack of liquidity. CSX has access to attractive financing terms and recently issued $650 million in medium-term notes.

Investor Verification Checklist

• Conrail Integration Timeline: Verify the progress of labor agreements and technology integration required for the early 1999 operational merger.
• Coal Export Volumes: Monitor the impact of the strong U.S. dollar on coal export demand, a key revenue driver.
• Y2K Remediation Costs: Track actual spending against the estimated $87 million total budget to ensure no material overruns.
• Conrail Financials: Review Conrail's standalone performance excluding acquisition charges to assess the underlying asset quality.
• Debt Refinancing: Confirm the successful replacement of commercial paper with longer-term debt to manage interest rate exposure.